When I talk to self-directed SMSF trustees their excuse for not diversifying more from Aussie Shares and Term Deposits was that it was difficult to understand some sectors and to get a decent diversification without building a huge portfolio of stocks, unlisted managed funds, bonds, hybrids etc. They hated application forms especially for SMSF investments but they have been reluctant to use a platform despite my argument that often a platform was a useful vehicle. Most just are not interested in another layer of fees for their SMSF. Each to their own so I left the argument there. However now the mountain is coming to them!

The following is general information and not a recommendation, you still need to do your own research or get advice for your personal circumstances.

In November 2017 Vanguard Australia finally launched a suite of four exchange traded funds (ETFs) that provide greater access to their leading diversified portfolio strategies. This will make SMSF and personal investing a far more accessible and transparent option for many and ultimately help them achieve their financial goals at a lower cost, easier reporting and with less paperwork than currently. They offer a great opportunity to develop a well simple, market leading diversified core to your portfolio.

The four Vanguard Diversified Index ETFs build on their extensive suite of ETFs and unlisted Managed Funds, and are one of the first ETFs allowing investors to gain diversification across and within all major asset classes, while making a clear choice about how much risk they take on. I would argue that AMP’s DMKT and Schroder’s GROW do this to some extent but not at this low a cost as they are actively managed an many might think they are a good blend with Vanguard’s new range.

The conservative (VDCO), balanced (VDBA), growth (VDGR) and high growth (VDHG) ETFs offer investors simple, single trade access to Vanguard’s global expertise in portfolio management and asset allocation, with annual investment costs at just 0.27 per cent. Yes that’s only $2.70 management fee for every $1000 invested in a diversified portfolio, wipe the floor of many industry and retail super funds.

Each Diversified Index ETF is a share class of an existing Vanguard Diversified Index Fund, meaning ETF investors can tap into the benefits of an established asset pool, collectively worth more than $7 billion, through Vanguard’s existing range of non-listed multi-asset funds. Vanguard’s Diversified Index Funds consistently rank in the top quartile of performance with their peers over three, five and 10 year periods, according to Morningstar.

Yes you are giving up some transparency and control but I believe you can rely on Vanguard’s investment experts to continuously assess their portfolio’s exposure and periodically rebalance it back to its intended level of risk.”

Each Vanguard Diversified Index ETF provides investors with extensive global exposure to around 6500 individual companies and more than 5000 fixed income securities.

Just in case you have not heard of Vanguard, here is a little detail to help build a picture of their strength and reach:

The Vanguard Group, Inc.: Key facts and figures*

Founded

1975

Total assets under management

AUD $5.9 trillion

Funds offered

180 in the US, and 190 funds in markets outside the US

Ownership

The Vanguard Group, Inc. is owned by its US-domiciled funds,

which are owned by their shareholders.

Headquarters

Valley Forge, Pennsylvania, USA

Chairman and CEO

F. William McNabb III

Number of employees

About 15,000 worldwide

Vanguard’s Investment Strategy Group, a global team of researchers and analysts, set the asset allocation of the diversified funds as part of a robust framework used by Vanguard globally. This framework includes analysis of concentration risk and currency exposure, and incorporates comprehensive modelling generated by Vanguard’s proprietary forecasting engine, the Vanguard Capital Markets Model.

Looking for an adviser that will keep you up to date and provide guidance and tips like in this blog? Then why not contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options. Do it! make 2018 the year to get organised or it will be 2028 before you know it.

Please consider passing on this article to family or friends. Pay it forward!

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

I am being inundated by queries from young men aged 20-40 looking to learn more about Bitcoin and then a cohort of traditional SMSF trustees aged 40-70 who have an interest in alternative investments and especially Gold who now want to at least know more about Bitcoin and cryptocurrencies in general. so when I came across this latest paper dealing with both subjects from my good mate Jordan Eliseo, Chief Economist at ABC Bullion I twisted his arm to let me share it to my readers.

The key finding of his paper are:

KEY FINDINGS

Blockchain technology has serious real world applications – it is here to stay

Given valuations in broader financial markets, it can make sense to speculate in the cryptocurrency market with a small portion of one’s wealth

Cryptocurrencies like Bitcoin are money today, but whether that status will endure remains to be seen

Physical gold remains the simplest and most effective hedge against the monetary, market, and macroeconomic risks that investors confront today

Now, if you are determined to go ahead and invest in Bitcoin or other cryptocurrencies then you need to do some serious groundwork.

NOTE: I DO NOT RECOMMEND CRYPTO CURRENCIES AS A SUITABLE INVESTMENT FOR AN SMSF, I AM JUST MAKING SURE THAT THOSE WHO DO INVEST DO IT COMPLIANTLY

How the SMSF regulations affect investing in Bitcoin, Ethereum or other cryptocurrencies

SMSF Professionals and Trustees should be well aware of the restrictions placed on the investment choices of SMSFs by the Superannuation Industry (Supervision) Act 1993 and supporting regulations. The Australian Taxation Office (ATO) is in charge of the administration of these rules and they have issued this guidance on their website:

Although there are not yet any formal rulings from the ATO clarifying how the rules apply to Bitcoin, there are a number of Tax Determinations that help guide any SMSF Trustees considering investing in bitcoins.

TD 2014/25 Income tax: is bitcoin a ‘foreign currency’ for the purposes of Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997)

TD 2014/26 Income tax: is bitcoin a CGT asset for the purposes of subsection 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997)

TD 2014/27 Income tax: is bitcoin trading stock for the purposes of subsection 70-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997)

Considerations before investing in Bitcoin:

Is it right for your needs and objectives? Consider if an investment in Bitcoin would satisfy the ‘sole purpose test’? – Are you honestly investing in it for your retirement?

In your circumstances does Bitcoin investing suit your risk tolerance (and the other member’s of your SMSF) and have you done enough research to validate your investment decision,

Does you Trust Deed allow for investing in bitcoins or cryptocurrencies. Read your deed and maybe ask the trust deed provider.

Talk to your fund’s auditor before proceeding as they have to sign off on the investment’s validity annually so better to run the strategy by them upfront.

They may ask you to verify the following:

If you wish to proceed with a purchase then have you amended your SMSF’s investment strategy to cater for this investment? Click the link for more details.

Trap: Make sure you know who is in ‘control’ the bitcoins? All assets must be clearly in the name/control of the trustees of the fund

How would the SMSF acquire the bitcoins? Do not acquire them from yourself or a “related party”

How secure is the exchange/wallet you are storing your cryptocurrencies in. Some have been hacked and coins lost.

No matter what it is essential to do you research and not take a gamble with your retirement nest egg unless you have covered all your bases.

Audit Tip:

Auditors and trustees can have access to the single public ledger that records Bitcoin. Websites such as Blockchain, BlockExplorer and Blockonomics allow input of a transaction ID to get detailed data of that Bitcoin transaction. Third party verification for auditors is therefore also possible. You can obtain a transaction list from the SMSF wallet provider and verify each holding. I am sure further tools will become available.

Looking for an adviser that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options. Do it! make 2016 the year to get organised or it will be 2026 before you know it.

Please consider passing on this article to family or friends. Pay it forward!

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

UPDATE

ATO approve $1 million threshold carve out SMSFs that have no members with a total superannuation balance (TSB) of $1 million or more will be able to report TBC transactions annually in line with current processes. This is a permanent carve-out for all SMSFs which meet this condition. The ATO have agreed with our position that individuals who are no risk of breaching the $1.6 million TBC should not be forced into a regular reporting framework. See here for more detail from ATO

I am getting many questions about the workings of the Transfer Balance Account Report (TBAR), Transfer Balance Cap (TBC) and Total Super Balance (TSB). So, in this 3-part series I will explain each one for you starting with your Transfer Balance Account Report. Most of this material is sourced from various ATO webpages and collated here for your guidance with my commentary.

So what is in your transfer balance account (TBA)?

There has always been a problem with the data available to the ATO in terms of how much people have in different phases of superannuation throughout the year with the ATO often having to wait until a few months after the end of the year for APRA fund reporting and nearly 11 months for SMSF data to flow through.

The transfer balance account is a new method designed by the ATO of tracking transactions and amounts in retirement phase. The balance of your transfer balance account determines whether you have space under your cap or if you have exceeded your transfer balance cap at the end of any given day. The transfer balance cap is a limit on the amount you can hold in retirement phase ($1.6 million in 2017–18).

You will start to have a transfer balance account on:

1 July 2017, if you are already receiving a retirement phase income stream at the end of 30 June 2017, or

the day you first commence receiving a retirement phase income stream.

It is important to understand that this TBA includes information from all your superannuation pension accounts via SMSF, Retail, Employer, Industry funds, annuity providers and other funds. It is on a consolidated basis and not per account.

All super providers, including self-managed super funds (SMSFs) and life insurance companies, with members in retirement phase will be required to complete and lodge this report to the ATO. The ATO will collate the data under your TFN and make available your consolidated Transfer Balance Account to you and your advisers.

Your transfer balance account measures your transfer balance, which is the sum of credits less the sum of debits posted to the account.

Now if you are like me then you tend to get totally confused when it comes to what is a debit and what is a credit so let’s take a refresher

My short code is “C+ and D-“ Credit = an addition to your total balance and Debit = a lowering of your total balance

It might be good to clear up some confusion by stating upfront that these events are not reportable.

Events that do not need to be reported include:

pension payments

investment earnings and losses

when an income stream is closed because the interest has been exhausted.

These are Credits to your account

Credits to your transfer balance account increase your transfer balance and reduce your available cap space. The most common transfer balance credit arises when you begin receiving a super income stream (pension) that is in the retirement phase.

The following amounts are credits to your account:

the total value of any super interests that support retirement phase income streams you are receiving on 30 June 2017

the value of new retirement phase income streams, including super death benefit income streams and deferred super income streams, that you begin to receive on or after 1 July 2017

the value of reversionary super income streams at the time you become entitled to them (although the timing of the credit may differ in certain circumstances)

the excess transfer balance earnings that accrue on any excess transfer balance amount you have.

For a capped defined benefit income stream, the credits above are calculated on the special value of the income stream.

The value of your super interests will be calculated by your super fund(s) accountant or administrator and notified to the ATO.

These are Debits to your account

Debits to your transfer balance account may:

reduce your excess transfer balance, and/or

increase your available cap space.

Events that cause your account to be debited include commutations, structured settlement contributions, and certain other events that cause a change in the value of your retirement phase interests.

Commutations

When a super income stream is fully or partially commuted, your transfer balance account is debited by the value commuted. The debit arises when you receive the lump sum, and applies whether you choose to transfer the lump sum to an accumulation account or withdraw it from super.

You must commute an income stream before you can roll it over to another fund.

Pension payments from your retirement phase account(s) are not commutations and are not debited from your transfer balance account.

Structured settlement contributions

A debit arises for a structured settlement that you receive (as payment for a personal injury you have suffered) and contribute towards your accumulation or retirement phase super interests.

Events resulting in a reduction of your super interest

You may be entitled to a debit in your transfer balance account if you lose some or all of the value of your super interests through events such as fraud, dishonesty, or void transactions under the Bankruptcy Act 1966.

Commutation authorities

The ATO may issue a commutation authority to super providers where a member has exceeded their transfer balance cap. A commutation authority will detail the amount that must be commuted for that member.

Payment split upon divorce or relationship breakdown

Super interests may be split as part of the division of property following a divorce or relationship breakdown. One party (the member spouse) will be required to provide a proportion of their retirement phase super interest(s) to the other party (the non-member spouse).

For either spouse, the debit arises either when the payment split becomes operative (under the Family Law Act 1975) or when they start to have a transfer balance account (whichever is later).

Failure to comply with pension or annuity standards

If your super fund fails to comply with the rules or standards for your income stream, that income stream may cease to meet the definition of a ‘superannuation income stream’. This means it will no longer be eligible for the earnings tax exemption.

The most common situation is where the super fund fails to pay the minimum pension amount required for a financial year under the regulatory rules. If this occurs, for transfer balance cap purposes, the income stream is taken to have stopped meeting the definition at the end of that financial year.

The debit equals the value of your income stream just before it stops meeting the definition. The debit arises in your transfer balance account when the income stream stops meeting the definition. This debit means you will be able to fully commute the income stream, and start a new one that complies with the pension or annuity standards, without breaching your transfer balance cap.

Self-managed super fund (SMSF) reporting

The ATO recognises that this is a major change for SMSFs so as a transitional concession, SMSFs will generally not need to commence reporting using the TBAR until 1 July 2018. The ATO is still currently consulting with industry on the model of event based reporting to apply from 1 July 2018.

TBAR lodgment is available from 1 October 2017 and submitted forms will be accepted from that time onwards if the choice is made to lodge earlier.

You should be talking to your Advisers, Accountants or Administrators to see how they plan to manage your reporting. If you have only been seeing them once a year then you may need to work out a solution for a quarterly update if you are in or near pension phase. You will need your various advisers to work as a team going forward to avoid late reporting. See Are your accountant, lawyer and financial planner working as a team for your benefit?

Although SMSFs with a member balance of over $1,000,000 will not generally need to commence TBAR reporting until 1 July 2018, SMSFs will need to ensure they have appropriately documented income stream valuations and decisions for the 2017-18 year. Until reporting begins, SMSF members must monitor the value of retirement income streams they receive to ensure they will not be in excess of the transfer balance cap from 1 July 2017 onwards.

The general exception to starting to report on 1 July 2018 does not apply:

if the ATO have issued an Excess Transfer Balance (ETB) Determination to a member because they have exceeded their cap and they choose to commute an income stream in their SMSF. Where this applies, the SMSF must report the commutation within 10 business days after the end of the month in which it occurred to avoid a commutation authority being issued. If the member chooses to commute an income stream the SMSF has not yet reported it to the ATO, the SMSF will also need to report the commencement date and value of the relevant income stream at the same time as a separate event

when a commutation authority is issued to an SMSF. The SMSF must abide by legislated reporting requirements. Refer to commutation authorities for more information.

To avoid the incorrect issue of an ETB Determination to a member, you are encouraged to report the following events as soon as possible if they occur before 1 July 2018:

any debit where an SMSF member is commuting an income stream because they have become aware they have exceeded their transfer balance cap

any debit that occurs prior to a member rolling over some or all of their retirement phase income stream out of their SMSF and starting a new retirement phase pension or annuity with another provider

any structured settlement contributions made to the fund on or after 1 July 2017.

Consequences of late reporting

Once your reporting has commenced, lodge the TBAR with the ATO as soon as practicable after the event has occurred to ensure your member’s transfer balance account is updated.

If you do not lodge the report by the required date your member’s transfer balance account will be adversely affected and they may be penalised. You may also be subject to compliance action and penalties.

Want a Superannuation Review or are you just looking for an adviser that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options. Do it! make this the year to get organised or it will be 2028 before you know it.

Please consider passing on this article to family or friends. Pay it forward!

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

It always amazes me that very often when I take an SMSF under my advice that I find that the estate planning and use of Binding Death Benefit Nominations has been haphazard, lacking in essential detail, ignorant of the SMSF deed requirements or just missing. People spend their lives amazing a nestegg only to be lax in ensuring it goes to who they want when they die.

A recent decision has clarified three issues regarding the validity of binding death benefit nominations. I have relied on the following summary from Townsend Law’s Michael Hallinan for interpretation of the decision.

A recent decision of the South Australian Court of Appeal (Cantor Management Services Pty Ltd v Booth [2017]) has passed important comment on no less than three different issues regarding the validity of a binding death benefit nomination (BDBN).

The critical issue was whether a BDBN was valid. If valid, then the death benefit was payable to the estate of the deceased member. If invalid, then the trustee would decide the allocation of the benefit.

The validity turned upon the issue of whether the BDBN had been served on the corporate trustee. The BDBN had been signed by the member and then left in the possession of the accountants of the SMSF at their office which was also the registered office of the corporate trustee.

Issue No 1

The sole director of the corporate trustee had argued that as the BDBN had not been provided to the director nor had the accountants been expressly authorised to accept and hold the BDBN on behalf of the corporate trustee, then the BDBN had not been properly served on the corporate trustee.

The Court did not accept the argument put by the corporate trustee. The Chief Justice held that it was sufficient to constitute service on the corporate trustee for the BDBN to be held by the accountants of the SMSF at the registered office of the corporate trustee. The other justices agreed with the Chief Justice.

Issue No 2

The second issue was that the Court opined that the accountants had a duty to keep the BDBN safe and also had a duty to bring to the attention of the trustee of the SMSF that they held the BDBN. If the Court had held that service had not been properly effected, the defendant may have been able to sue the accountants for their negligence in failing to advise the trustee that they were holding the BDBN. Luckily for them the Court said that service was good anyway.

Issue No 3

The third issue was that Court agreed with the decision of Munro v Munro, which held that SIS regulation 6.17A does not apply to SMSFs (unless the trust deed of the SMSF explicitly or implicitly incorporates the regulation). It is surprising that a few industry die-hards still argue that reg 6.17A might still apply to SMSFs despite the number of times the courts have said otherwise.

The original article by Michael Hallinan of Townsends Business & Corporate Lawyers can be found here and you can contact them on (02) 8296 6222. I highly recommend signing up for their newsletter.

Make sure to check your with your own current death benefit arrangements or contact us for a review.

Looking for an adviser that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options. Do it! make 2016 the year to get organised or it will be 2026 before you know it.

Please consider passing on this article to family or friends. Pay it forward!

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Your superannuation trust deed along with the superannuation laws form the governing rules that self managed super funds (SMSFs) needs to operate by. The introduction of the $1.6 million transfer balance cap (TBC) and new transition to retirement income stream (TRIS) rules are a ‘game changer’ for SMSFs when discussing benefit payments and estate planning. With the new super rules in effect as of 1 July 2017, now is the right time to review if your trust deed needs to be enhanced or amended to deal with the new approaches and strategies you may need to implement.

Read the deed

The first step in reviewing your superannuation trust deed will be to read it. Trust deeds are legal documents which can be complex to read, so you may want help from an advisor with this.

It is likely that most deeds will not result in a breach of any superannuation laws and would provide the trustee with powers to comply with relevant tax and superannuation laws as they change over time.

The next step would be to review the deed in consideration with your own circumstances.

For example, a common scenario may be a restrictive deed that only provides the trustee with a discretion to pay death benefits. Therefore, if a member of that SMSF wanted to create a binding death benefit nomination, it would be irrelevant due to the deed’s governing rules.

In any event, deeds which are clearly out of date will need to be amended as soon as possible.

Deeds post 1 July 2017

Post 1 July 2017, there are many approaches and strategies that will differ from the past and it is essential to ensure that your SMSF deed does not restrict you in anyway. We note the following areas should be considered:

Paying death benefits

The $1.6 million TBC now restricts the amount of money that can be kept in super on the death of a member. This is crucially important as when a member dies, their TBC dies with them. SMSF members should review their estate planning and further review their trust deed for the following:

Does it allow for binding death benefit nominations (BDBN)?

Do BDBNs lapse every 3 years in accordance with the trust deed when the legislation does not prescribe it?

Does it consider the appropriate solution when there is a conflict between a reversionary pension and a BDBN and which will take precedence?

Reversionary pensions

Reversionary pensions are pensions which continue being paid to a dependant after your death. Under the TBC, reversionary pensions will not count towards a member’s TBC until 12 months after the date of the original recipient’s death. Importantly, the transfer of the pension from the deceased to the new recipient will count towards the TBC. The value of the credit to the TBC will be the value of the pension at the date of death, not the value after 12 months. This increases the complexity of reversionary pensions prompting a review of trust deeds to consider:

Does it allow for a reversionary pension to be added to an existing pension or are there restrictions?

Should it automatically ensure that a pension is reversionary so that it is paid to a surviving spouse?

Pensions

The TBC also has implications for strategies in commencing pensions and making benefit payments. Trust deeds may need to be reviewed for:

Ensuring that commutations are able to be moved into accumulation phase rather than being forced as lump sums out of superannuation.

Are there any specific provisions relating to the TBC? There may be value in ensuring that the deed restricts pensions from being commenced with a value greater than the TBC.

Are there provisions which detail where commutations must be sourced from first?

Are there restrictive pension provisions that the trustees must comply with?

Transition to retirement income streams

Tax concessions for TRISs where the recipient does not have unrestricted access to their superannuation savings (known as meeting a condition of release with a nil chasing restriction) have also been removed. Trust deeds may need to be reviewed for:

Does the deed allow for the 10% maximum benefit payment to fall away once a nil condition of release is met?

Does the deed deal with a TRIS’s character when a nil condition of release? (Does it convert into an account based pension?)

How can we help?

SMSF Specialist Advisors can help you understand how the new laws may impact you and partner with a lawyer/Deed provider to review and amend your trust deed as required. Please feel free to give me a call to arrange a time to meet so that we can discuss your particular requirements, especially in regards to issues that may arise out of the latest super laws, in more detail.

For further educational information please subscribe to this blog and also visit the SMSF Association’s Trustee Knowledge Centre (http://trustees.smsfassociation.com/) to keep on top of the latest changes and information to reach your retirement goals and get the most out of your self managed super fund.

Want a Superannuation Review or are you just looking for an adviser that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options. Do it! make this the year to get organised or it will be 2028 before you know it.

Please consider passing on this article to family or friends. Pay it forward!

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

I love working on strategies for clients but sometimes you just need a true expert or excellent software to crunch the numbers. I was looking for some ideas on downsizing as it had become clear to me that is was not the panacea to retirement funding that client’s often believe it would be. So I was looking for an in-depth article working through the numbers and Rob van Dalen of Optimo Financial has kindly stepped up to provide the required analysis in our latest guest blog. Rob’s main warning is to do your sums on your own particular situation before leaping in to a downsizing strategy.

Do Your Sums Before Downsizing

A popular subject often talked about at family barbecues is; “should mum and dad downsize when they get older?” Often it’s assumed that downsizing is the best option moving forward. To test and possibly challenge this we decided to run a few scenarios through our Pathfinder Financial Optimisation Platform to find out. Read our findings below;

1.1 The Clients

In this example, we look at the case of David and Alice who have recently retired and who will soon both be eligible for the age pension. David was born on 11 April 1953 while Alice was born on 15 November 1952. They have a modest $400,000 in super. Their other assets are the family home valued at $900,000 and personal assets valued at $40,000. They have no debt. They would like to have $50,000pa (increasing at CPI) for living expenses. They are worried that their super is not sufficient to maintain their desired income. Consequently, they have contemplated selling the family home and moving to a cheaper area where they could buy a new home for $500,000. Will downsizing leave them better off?

1.2 Assumptions

We have assumed in the analysis:

· Pension fund returns 5.7%pa;

· House selling costs 2.5%;

· House purchase costs 6% (including stamp duty);

· House prices in the long term increase at 3%pa;

· CPI 2.5%p.a.

1.3 Scenario 1: Retain Current Home

We first examine the scenario where David and Alice retain their current home. In this case, they will receive income from the government pension as well as drawing a pension from their own super. Figure 1 shows the sources of their income over a 20 year period.

David and Alice receive approximately 64% of their income from the age pension and associated benefits (see also Figure 6 below). The remainder is withdrawn from their pension account through withdrawing the minimum amount each year (plus some extra for the first few years until they become eligible for the age pension).

Their age pensions are limited approximately equally by the income and assets tests. After 20 years, David and Alice have a combined wealth of $1,960,000 most of which is from the family home.

1.4 Scenario 2: Downsizing Family Home in 2016/17

The next scenario sees David and Alice downsizing their family home from $900,000 to $500,000 in 2016/17. Their ages enable them to deposit the excess funds generated from the house sale into super as non-concessional contributions. However, a Pathfinder® analysis shows that increasing their superannuation balance reduces their age pension because, unlike the family home, super counts towards the age pension assets test and is deemed for the income test. Figure 2 shows the results of the age pension assets and income tests for David and Alice and we can see that their pension is now limited by the assets test. For a home owning couple, the age pension reduces at a rate of $3 per fortnight for each $1,000 of assets in excess of $575,000. This taper rate was doubled from 1 January 2017, so now has a much larger impact on the pension received.

So in 2019/20, for example, their age pension reduces from $36,337 to $9,004 and they must draw more from their pension account to make up the difference. Their wealth after 20 years is now projected at $1,581,000 or about $379,000 less than in the first scenario.

1.5 Scenario 3: Downsizing Family Home in 2027/28

In the third scenario, we examine the possibility that David and Alice defer the downsizing for ten years, say in 2027/28. Their age pension is initially unaffected until they downsize the family home, but after that time their age pension payments are severely curtailed. Their projected wealth after 20 years is now $1,714,000. This is a better outcome than in the second scenario but is still $246,000 less than if they keep their existing home.

1.6 Comparing the Scenarios

Figure 3 gives a comparison of the annual age pension received in the three scenarios. You can see that the scenario where they retain their current home, yields a higher pension and that their pension drops sharply after the sale of their house in the other two scenarios.

Figure 4 shows the total age pension payments over the 20 years. You can see that by keeping their original family home, their total pension entitlement is significantly higher than either of the downsizing options we analysed.

Figure 5 shows the total wealth over the 20 year period analysed.

The first point to note is the importance of the age pension towards retirement income, depending, of course, on the particular circumstances. Figure 6 shows the composition of retirement income over the 20 years analysed for Scenario 1.

1.7 Conclusions

In this example, the age pension plus estimated concession card benefits contribute about 64% to income while the account based pensions contribute about 36%. The second point is that downsizing the family home may not result in improving the overall situation as an increase in payments from a private pension may be more or less offset by a decrease in the age pension.

1.8 Pathfinder Learnings

In our Pathfinder® analysis, we find, perhaps surprisingly, that a couple could be considerably worse off by downsizing the family home. Any funds added to super by the income generated from downsizing could be dissipated by a reduction in the age pension. In addition, the costs of sale and repurchase of a family home are significant.

The age pension can provide a buffer between retirement savings and lifestyle expenses.

For persons eligible for the age pension, downsizing the family home may leave you worse off financially because of the impact of the age pension income and assets test.

Thank you Robby

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

There are many rumours and well-intentioned but wrong advice out here on the internet about how to maximise Centrelink or DVA pension by “gifting assets” before applying. I want to clear up some of those misunderstandings

The gifting and deprivation rules prevent you from giving away assets or income over a certain level in order to increase age pension and allowance entitlements. For Centrelink and Department of Veteran’s Affairs (DVA) purposes, gifts made in excess of certain amounts are treated as an asset and subject to the deeming provisions for a period of 5 years from disposal.

Acknowledgement: I have relied on the excellent guidance of the AMP TAPin team for the majority of the content in this article. They write great technical articles for advisors and I try and make them SMSF trustee friendly.

What is considered a gift for Centrelink purposes?

For deprivation provisions to apply, it must be shown that a person has destroyed or diminished the value of an asset, income or a source of income.

A person disposes of an asset or income when they:
− engage in a course of conduct that destroys, disposes of or diminishes the value of their assets or income, and
− do not receive adequate financial consideration in exchange for the asset or income.

Adequate financial consideration can be accepted when the amount received reasonably equates to the market value of the asset. It may be necessary to obtain an independent market valuation to support your estimated value or transferred value or Centrelink may use their own resources to do so..

Deprivation also applies where the asset gifted does not actually count under the assets test. For example, unless the ‘granny flat’ provisions apply, deprivation is assessed if a person does not receive adequate financial consideration when they:

− transfer the legal title of their principal home to another person, or
− buy a new principal home in another person’s name.

What are the gifting limits?

The gifting rules do not prevent a person from making a gift to another person. Rather, they cap the amount by which a gift will reduce a person’s assessable income and assets, thereby increasing social security entitlements.

There are two gifting limits.

A person or a couple can dispose of assets of up to $10 000 each financial year. This $10, 000 limit applies to a single person or to the combined amounts gifted by a couple, and

An additional disposal limit of $30 000 over a five financial years rolling period.

The $10,000 and $30,000 limits apply together. That is, although people can continue to gift assets of up to $10 000 per financial year without penalty, they need to take care not to exceed the gifting free limit of $30 000 in a rolling five-year period.

What happens if the gifting limits are exceeded?
If the gifting limits are breached, the amount in excess of the gifting limit is considered to be a deprived asset of the person and/or their spouse.

The deprived amount is then assessed as an asset for 5 anniversary years from the date of gift. It is assessed as an asset for asset test purposes and subject to deeming under the income test.
After the expiration of the 5 year period, the deprived amount is neither considered to be a person’s asset nor deemed.

Example 1: Single pensioner – gifts not impacted by deprivation rules

Sally, a single pensioner, has financial assets valued at $275,000. She has decided to gift some money to her son to improve his financial situation. Her plan for gifting is as follows:

Financial year

2017/18

2018/19

2019/20

2020/21

2021/22

2022/23

Amount gifted

$6,000

$6,000

$6,000

$6,000

$6,000

$6,000

With this gifting plan, Sally is not affected by either gifting rule. This is because she has kept under the $10,000 in a single year rule and also within the $30,000 per rolling five-year period.

Example 2: Single pension – Gifts impacted by both gifting rules

Peter is eligible for the Age Pension. He has given away the following amounts:

Financial year

Amount gifted

Deprived asset assessed using the $10,000 in a financial year free area rule

Deprived asset assessed using the $30,000 five-year free area rule

2017/18

$33,000

$23,000

$0

2018/19

$2,000

$0

$0

In this case, $23,000 of the $33,000 given away in 2017/18 exceeds the gifting limit (the first limit of $10,000) for that financial year, so it will continue to be treated as an asset and subject to deeming for five years.
In 2018/19, while gifts totalling $35,000 have been made, no deprived asset is assessed under the five-year rule after taking into account the deprived assets already assessed, ie $33,000 + $2,000 – $23,000 = $12,000, which is less than the relevant limit of $30,000.

Example 3: Couple impacted by both gifting rules

Ted and Alice are eligible for the Age Pension. They give away the following amounts:

Financial year

Amount gifted

Deprived asset assessed using the $10,000 in a financial year free area rule

Deprived asset assessed using the $30,000 five-year free area rule

2017/18

$10,000

$0

$0

2018/19

$13,000

$3,000

$0

2019/20

$10,000

$0

$0

2020/21

$10,000

$0

$10,000

2021/22

Any gifts in 2014/15 will be assessed as deprived assets under the five-year rule

In this case, $3,000 of the $13,000 given away in 2018/19 exceeds the gifting limit for that year, so it will continue to be treated as an asset and subject to deeming for five years. The $10,000 given away in 2020/21 exceeds the $30,000 limit for the five-year period commencing on 1 July 2017, so it will also continue to be treated as an asset and subject to deeming for five years.

Are some gifts exempt from the rules?

Certain gifts can be made without triggering the gifting provisions. Broadly speaking, these include:
− Assets transferred between the members of a couple. A common example is where a person who has reached Age Pension age withdraws money from their superannuation and contributes it to a superannuation account in the name of the spouse who has not yet reached age pension age.
− Certain gifts made by a family member or a certain close relative to a Special Disability Trust. For more information on Special Disability Trusts, refer to Department of Human Services – Special Disability Trusts.
− Assets given or construction costs paid for a ‘granny flat’ interest. See Department of Human Services – Granny Flat Interest for further detail.

Trying to be too smart – Gifting prior to claim

Contrary to what many read on the internet any amounts gifted in the five years prior to accessing the Age Pension or other allowance are subject to the gifting rules

Deprivation provisions do not apply when a person has disposed of an asset within the five years prior to accessing the Age Pension or other allowance but could not reasonably have expected to become qualified for payment. For example, a person qualifies for a social security entitlement after unexpected death of a partner or job loss.

Gifting and deceased estates

The gifting rules apply to a person’s interest in a deceased estate if the person does any of the following:

− Gives away their right to their interest in a deceased estate for no/inadequate consideration,
− Directs the executor to distribute their interest in a deceased estate for no/inadequate consideration, or
− After the estate has been finalised, gives away their interest in a deceased estate to a third-party for no/inadequate consideration.
The above rules apply even if the deceased died without a will.

Gifting and death of a partner
In some circumstances, couples in receipt of a social security benefit may give away assets prior to death of one of them. Prior to death, any deprived assets would have been assessed against the pensioner couple for five years from the date of the disposal. Now that a member of the couple has passed away, how will the deprived assets be assessed for the surviving partner?
The amount of deprivation that continues to be held against a surviving partner depends on who legally owned the assets prior to death.

Table 1: Gifting and death of a partner

Legal owner of the deprived asset

Assessment of deprived assets

jointly,

does not change.

by the deceased partner,

is reduced to zero.

by the surviving partner,

increases by the amount held against the deceased partner by the outstanding balance held against the deceased partner.

Example 4: Death of a partner

Daryl (age 84) and Gail (age 78) gifted an apartment worth $260,000 to their son Ethan on 1 July 2019. At the time the gift was made, Centrelink assessed $250,000 as a deprived asset. Daryl passed away on 1 July 2020.
The treatment of the deprived assets for Gail will depend on who legally owned the assets prior to Daryl’s death. The impact of different ownership options is shown below:

Legal owner of the deprived asset

Assessment of deprived assets

jointly,

Half of the asset value of the deprived asset will be assessed against the surviving spouse. As the amount of the deprived asset is $250,000, only $125,000 will be assessed against Gail

by the deceased partner,

No amount will be assessed against the surviving partner. As the amount of the deprived asset is $250,000, the amount assessable to Gail is $0.

by the surviving partner,

The full amount will continue to be assessed against the surviving partner. As the amount of the deprived asset is $250,000, the amount assessable to Gail remains at $250,000.

Want a Centrelink Review or are you just looking for an adviser that will keep you up to date and provide guidance and tips like in this blog? Then why not contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options. Do it! make this the year to get organised or it will be 2028 before you know it.

Please consider passing on this article to family or friends. Pay it forward!

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

For many people setting up an SMSF, insurance is an afterthought but the law says that SMSF trustees must formulate, review regularly and give effect to an investment strategy that includes consideration of whether to hold insurance cover for one or more members of the fund. So that is why we usually have to do a needs analysis and work out where to place cover if required.

After we have assessed a new member’s insurance needs we look at what you have in place already and replacement options. But often we need to work with what you have due to changes in health or disparity in premiums when comparing group and individual rates. The basic facts on health are that most of us have some sort of issue by age 45 that triggers further investigation and loadings or exclusions by insurers before they offer cover. The latter issue of premiums is rapidly changing as retail and industry super funds hike insurance premiums and move more towards individual underwriting.

Our preference is to tidy up people’s affairs rather than complicate them and we do prefer to replace insurances where possible and use a combination of policies held inside and outside of your SMSF to maximise the breath and quality of cover while managing the premiums tax effectively. However where new cover cannot be obtained without loadings or exclusions we look at strategies for keeping existing cover in place. THIS IS WHY YOU NEVER ROLLOVER EXISTING POLICIES WITHOUT REVIEWING INSURANCES FIRST.

One of the strategies we use is that when you start your SMSF we leave a portion of your superannuation balance in the large fund to retain the current covers. This is often because it can be cost effective retain life, total and permanent disability (“TPD”) and income protection insurance cover in a large fund.

One of the advantages in keeping a balance within an existing retail/employer or industry superannuation fund is access to sometimes lower cost group insurance that has been arranged on a Group Insurance basis by the superannuation fund. Often, no medical examinations are necessary to have access to reasonably high levels of cover.

Despite any advantages, there can be terms in these insurance arrangements that cause cover to cease. This could be unexpected and usually as a result of clauses found in a 40-50 page product disclosure document that you may never have read. Some of the common cancellation triggers we have found are are outlined below.

No employer contributions

A number of large super funds have a clause that states, if employer contributions cease for six/12/13 months, a member automatically loses income protection cover. We understand that this is a policy for certain large funds that offer members automatic income protection insurance. Usually one month before the cover expires the fund notifies the member that cover is about to cease.

Leaving an employer in an employer sponsored plan

When it comes to employer sponsored funds we are aware of funds that require that a particular employer makes contributions to the member account or the insurance stops. TPD and income protection cover cease without notice if the member is no longer working for that employer after 60/71/90 days and their account balance is less than typically $1,500 or $3,000. Another fund cancels the Income Protection cover immediately on leaving the employer and no continuation option is offered whereas they do offer to continue the Life and TPD automatically when the member rolls over to a personal plan.

Minimum balance requirements

To retain cover at many industry funds, the funds usually require that the member maintains a minimum balance in your account. The cut off point or trigger can be as low as $1,000 or as high as $10,000. While most large funds let members retain cover as long as premiums can be automatically deducted from their account, we are aware of a fund that will cease insurance cover for all insurances when the account balance falls below $3,000 and no employer contributions are made after 13 months.

No longer working in the public sector

Some large government funds cease insurance cover if the member no longer works within the public sector. We are aware of some public sector funds where income protection cover ceases on the day the member officially ceases employment with the relevant public sector and no continuation option is provided. There is also another public sector fund that will cease all cover after 60 days from the last employer contribution or when the member stops working in the relevant public sector. Often these public sector funds do not accept further contributions from third party employers or rollovers from other funds.

Terminal illness payouts based on TPD not Life sums insured

We are also aware of a funds whereby on terminal illness, the insurance can pay out at the TPD level, which is often lower than the amount of life cover especially for higher risk occupations. The payment reduces any remaining life cover paid on death. This can mean less funds are available to cover medical or palliative care costs while the insured is alive. Thankfully the standard method of terminal illness cover is to pay out 100% of life cover upon confirmation of a terminal illness with less than 12 months life expectancy.

The kick in the teeth with this restricted payout is that it can also give rise to more tax because the non-dependant beneficiaries will receive the death benefits, as opposed to the member receiving benefits tax free before they die.

Read the Policy and Product disclosure Statement and review it annually

Before relying on existing cover to continue ensure you read the product disclosure statement and policy document particular to your type of policy. do not rely on the latest PDS on the website as this may be for a newer plan and yours maybe an older plan closed to new members so the PDS may not be on the website. email for the exact the PDS you need to rely on so you have a record of the request. Likewise any questions should be directed to the super fund via email for clarification on exactly how insurance cover applies as we know you can get many different answers to the same question over the phone!

Many funds see the employer as their client and may not give adequate warning when insurance cover is about to cease. Therefore it is important to monitor accounts and your contact details periodically especially where you may have elected for email correspondence. Many a cancellation warning has been sent to old email or previous home addresses.

I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

There are many reasons to get a superannuation review especially if you are within 15 years of using your super funds more tax effectively (hint over age 45). A lot can be done to dramatically improve your retirement prospects given time. However if you leave it too late, the chances of making significant improvements are limited. Getting good financial advice can make all the difference to the quality of your retirement. You may not want a full advice service but you can just have a Superannuation and Insurance review. So here are a few reasons why a review could be one of the best decisions you make.

You’ve being putting money in to Super for over 20 years and not sure what it’s doing for you. You have more than one superannuation account and cannot keep a track of how them or how they are performing. Consolidating your accounts together could make keeping track of your savings much easier and moving house less of a hassle!

You may be considering adding funds or your tax agent may have recommended some salary sacrifice and you are suddenly more interested in getting value for money.

You may be interested and want to explore the use of a Self Managed Superannuation Fund known as a SMSF (it’s only one of the options available but we can help you assess if it is right for you).

You may not be satisfied with the level of service and advice you are receiving from your superannuation company and/or your adviser if you are getting any at all. Many people receive no service at all but continue paying fees year after year. Is it time for you to step-up and demand advice, we invite clients for a review at least twice per year.

You are concerned that your super or multiple accounts may not be performing very well. Sadly, most people in superannuation schemes have little or no idea how their funds are invested or performing from one year to the next. Reports get thrown in a drawer because the jargon is mind bending!

You may be unsure how much risk you are taking with your superannuation investments. It is undeniable that in order to increase your nest egg value, some risk will need to be taken. However the risk you are taking may not be suitable for you and categories like “Balanced or Core” don’t actually mean what they suggest!.

And how about just getting general health check on your super and how it is performing.

Like many people you have accumulated lots of accounts over the years from various jobs ( I recently consolidated 12 accounts for a couple). It may be beneficial to consolidate them all together in one account (wait don’t rush in, review insurance and fees first).

Identify poor performing superannuation funds and move them to investments that have greater potential for growth or a more consistent return.

You may have an SMSF or Superannuation account sitting in cash and just don’t know what to do as you have lost confidence.

You may have multiple/duplicate insurance arrangements across many funds and be paying premiums for cover that may never pay out.

How a superannuation review works

You are likely to have one or more personal accounts and they could be an industry fund, an employer group plan, a personal retail account, or even a transition to retirement pension .

A relationship with your advisor should last for many years. At Verante and the SMSF Coach, we take the time in our first meeting to understand you, explain how we operate, and what you should expect.

You decide whether you feel comfortable with us.

We determine how we can add value to your set of circumstances.

Together we discover what challenges and opportunities lay ahead.

The second step is our Discovery meeting as we spend a great deal of time gathering the necessary information to build a clearer picture of you. We discover you and your current circumstances – such as family, financials and aspirations. We also help you complete a Risk Profiling Questionnaire; this is designed to help identify what your attitude to risk is and your comfort with different classes of investment.

The third step is to obtain full details of all of your current superannuation, investment, debt and insurance arrangements. We ask superannuation companies more than 20 questions, so that we get a full and complete picture of your current situation.

The fourth step is where we complete a full and comprehensive analysis of your current arrangements, to identify if your super accounts are delivering on expectations, that insurance cover is valid and will protect you and your family and fees are under control.

Step five is to recommend a suitable strategies to move your Superannuation balance forward, should the review reveal that your existing accounts are not working as well as they should be.

Step six is to implement the recommendations, which may mean re-organising and consolidating your accounts into one super or even a pension fund.

And finally step seven is to keep your arrangements under regular review to ensure that it continues to perform and meet your objectives.

Want a Superannuation Review or are you just looking for an adviser that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options. Do it! make this the year to get organised or it will be 2028 before you know it.

Please consider passing on this article to family or friends. Pay it forward!

Also delighted to be named in the 50 mist influential investors and win the top award in the new 2017 SMSF and Accounting Awards.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

1 July 2017 was a major date when it comes to SMSF changes and accurate valuations are key to compliance with many of the changes. Unsure of what the valuation guidelines are for your self-managed superannuation fund (SMSF)? I have compiled a guide on what you need to know about asset valuation as SMSFs are now required to use market value reporting for all their financial accounts and statements. For Financial Year 2016/17, getting the value right is more important than ever, especially with the impact of the new super changes. Getting it wrong may impact on the fund’s compliance and whether you can make non-concessional contributions or commence a pension.

What is the market value of an asset?

“Market value” means the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made:

• the buyer and the seller dealt with each other at arm’s length in relation to the sale
• the sale occurred after proper marketing of the asset, and
• the buyer and the seller acted knowledgeably and prudentially in relation to the sale.

How do I go about determining market value?

For assets such as cash, term deposits, widely-held managed funds, ETFs and listed securities, these can be valued easily each year and should be valued at the end of each financial year. It is typically easy for trustees to value shares, managed funds and other listed investments because they can obtain daily valuations online. Here are a few links that may be helpful for historic share prices or for companies that have been delisted from the exchange.

DeListed carries historical share prices for many listed and delisted companies at this website, including prices for the former names of such companies. The prices go back as far as 1986 in some cases and include to mid-year 2009.

SMSFs with real estate, exotic assets or investments in private companies or trusts will require additional work from auditors. from an appropriately qualified person, such as an independent registered valuer or real estate agent.

The following guide provides an outline of what is required to help in valuing fund investments where market values are not readily available.

Real estate / Property valuations

Property needs to be valued at market value every year at 30 June, but the ATO does not require SMSF trustees to undertake an external valuation for all assets each year but is recommended at least every 3 years. For instance, assets such as real property may not need an annual valuation unless a significant event (i.e. natural disaster, market volatility, macroeconomic events or changes to the character of the asset) occurred that has created the need to review the most recent valuation.. Valuation of real estate can be undertaken by anyone, including the trustee(s), if suitably qualified, as long as it is based on objective and supportable data.

The following would generally be considered adequate audit evidence:

Real estate agent valuation (appraisal letter which they back up with comparable sales or listed properties)

Formal valuation from a qualified and independent valuer (compulsory if for commercial properties leased to related parties)

Valuation from trustees (with evidence of market valuation such as recent sales or online valuations). We recommend at least a comparison with values of 4-6 comparable properties if doing it yourself.

The latest cost-effective option is valuations from online real estate services like RPData can be used so ask your Administrator if they have access to this service.

Is the rent at commercial terms?

The fund’s auditor may also request evidence to show the rental income received by the fund is paid on commercial terms, such as

Annual Rental Income & Expenses Schedule from your real estate management agent covering the lease of the property during the year. Some charge $30-$50 for this but if you say it is offered free on your other properties you can squeeze them!

Supporting evidence such as For Rent listing or tenants notice to end contract and an explanation from the trustees if no rental income was received during the year

Units in unlisted trusts or shares in unlisted companies

It can sometimes be tricky to obtain reliable audit evidence to support the value of unlisted investments. The company or trust may not be required to value their assets at market value and trustees must consider the value of the assets held by the entity. For example, where the trust or company holds property, any value should be based on the guidelines for real estate outlined above. Sometimes the other owners (individuals. companies or family trusts) in the trust do not require the same degree of scrutiny and can refuse to incur the extra costs to to suit the SMSF requirements. You will need to work around this issue with your fund sometimes picking up the expense.

Another consideration is that unlisted entities may not be required to get their financial statements independently audited, which make them less reliable from an audit perspective.

The following would generally be considered adequate audit evidence:

Audited financial statements of the entity

A share/unit price based on recent sales or purchases of the shares or units

Financial statements of the entity, with evidence that the underlying asset is valued at market value recently.

Independent valuation of the underlying assets of the entity

Loans to related and non-related parties

When your fund makes a loan to another entity or individual not related to a member then the loan agreement will specify the terms and conditions of the loan, including payment terms, interest on the loan and whether the loan it is secured or unsecured.

The market value of a loan is determined by its recoverability which could be:

Evidence of repayment of the loan (if applicable)

Details on the financial position of the borrower confirming their ability to repay (e.g. net asset position, sources of cash)

Details and value of security held as collateral for the loan (if applicable)

Collectables and personal use assets

In the case of collectables and personal use assets, the valuer should be a current member of a relevant professional body or trade association such as the Australian Antique and Art Dealers Association, the Auctioneers and Valuers Association of Australia and the National Council of Jewellery Valuers. Collectable and personal use assets cover items such as artwork, memorabilia, collectable coins and bank notes, wine and vintage cars. Metals such as gold and silver are only considered collectable items if their value exceeds the value of the metal based on its weight.

Bullion

If a trustee holds bullion at a storage facility or at the mint the documentation provided by these places will act as proof of the holding to the auditor.
If trustees choose to store their bullion at home or their business premises the auditor will require a resolution as at 30 June of each year which confirms the following;
• Inventory listing of the type(s) and quantities of metal held.
• Confirmation the asset is stored securely and not available for personal use by the members.
• Confirmation that the metal(s) are insured for the correct value.
Valuation in this format is less costly than holding in the form of a collectible. The market value can easily be verified to live spot prices which are readily available on a number of Bullion dealers’ websites.

Who needs this information

Your administrator or accountants needs this information to complete the annual accounts. Apart from preparing your annual accounts, you will also need to value assets:

if your fund has investment dealings with, or sells assets to, a related party

if you need to determine the percentage of in-house assets in your fund

on the commencement day of a pension

if your fund transfers a collectable or personal use asset to a related party – in this case the valuation must be done by a qualified independent valuer.

So who’s watching me?

Your fund’s independent auditor (your accountant may hide this person fairly well in the background but you should make yourself know to them and make it a team relationship not an adversary one). It is their responsibility to be making checks as to whether the annual financial statements properly reflect the market value based on objective and supportable evidence. they may request you get further evidence if not satisfied and they can issue a qualified audit opinion. Any qualified opinion will be reported by the auditor to the ATO.

On assessing the auditor’s report if the ATO is not satisfied that the assets are not recorded at market value in the fund’s financial accounts a fine of 10 penalty units (currently $2,100) per trustee can be imposed.

ATO Valuation guidelines for self-managed superannuation funds

The ATO provides guidelines here on their website to assist SMSF trustees when valuing assets for superannuation purposes.

For SMSF members affected by the $1.6m transfer balance cap, an appropriate valuation is also essential for FY 2016/17 to determine whether the member’s pension balance(s) may exceed the cap and for purposes of the CGT cost base reset.

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Most people who have not sat with a planner or read in detail the newsletters from their superannuation funds would believe that they can only access their superannuation when they actually retire and stop working. But there are so many other circumstances that could trigger an all-important “Condition of Release” and make your retirement funds available to you. In this guide for SMSF trustees I will concentrate on meeting the Retirement Condition of Release but you can find out about the other conditions of release here (click it later).

Acknowledgement: I have relied on the excellent guidance of the AMP TAPin team for the majority of the content in this article. They write great technical articles for advisors and I try and make them SMSF trustee friendly.

What is the Retirement condition of release

The retirement condition of release is often subject to complexity and doubt. However, understanding the rules has become even more important after 1 July 2017 resulting from the 2016 Budget measures. The tax exemption on investment earnings supporting a Transition to Retirement Income Stream (TRIS)is no longer available. However, a TRIS will regain its tax exempt status once the ‘retirement’ condition of release is satisfied. Therefore, understanding what constitutes ‘retirement’ for an SMSF member in a TRIS is critical, to achieve that holy grail of a tax-free retirement pension.

Conditions of release – overview

Death is the only condition of release that requires compulsory cashing of benefits. There is no requirement under any other condition of release to either cash out a benefit or commence an income stream from your SMSF, and member accounts can remain in accumulation phase indefinitely.

If you do leave your member account in accumulation phase, it will be subject to an income tax rate of up to 15% instead of a 0% tax rate for investments backing a pension income stream. There is also now a $1.6m limit on how much can be transferred into an income stream.

The most common conditions of release to access your account are:

Reaching preservation age and retiring.

Date of birth

Preservation

age

Preservation year

Before 1 July 1960

55

2014-15 (and prior)

1 July 1960–30 June 1961

56

2016–17

1 July 1961–30 June 1962

57

2018–19

1 July 1962–30 June 1963

58

2020–21

1 July 1963–30 June 1964

59

2023–24

Transitioning to retirement (after attaining preservation age): SMSF members who are under 65 and have reached preservation age, but remain gainfully employed on a full-time or part-time basis, may access their benefits as a non-commutable income stream. However from 1 July 2017 that income stream will not be tax exempt until you meet a further Retirement Condition of Release.

Reaching age 65: a Member who is 65 years old may access their benefits anytime without restrictions.

Retirement condition of release

For superannuation purposes, a member’s retirement depends on their age and future employment intentions. A person cannot access superannuation benefits under the retirement condition of release until they reach preservation age. Once you reach your preservation age, the definition of retirement depends on whether the person has reached age 60.

If a person has never been gainfully employed in their life, they cannot use the retirement condition of release to access their Preserved Benefits. Such a person would need to satisfy another condition of release to access their benefits (eg reaching age 65, invalidity, terminal illness, severe financial hardship).

Preservation age but under age 60

Where a member has reached a preservation age that is less than 60, their retirement occurs when:

An arrangement under which the person was gainfully employed has come to an end; and

The trustee is reasonably satisfied that the person intends never to again become gainfully employed on either a full-time or part-time basis (ie for 10 or more hours per week).

To evidence retirement, the SMSF trustee should request a declaration from the member that they have ceased work and they have no intention of being employed for more than 10 hours a week ever again.

Age 60 but less than 65

When a person has reached age 60, retirement occurs when an arrangement under which the person was gainfully employed has ceased on or after the person reached age 60. It does not matter that the person may intend to return to the workforce. This condition presents an opportunity for many people to move a taxed pension to tax exempt phase earlier.

Example: Reaching age 60

Michelle has worked as a nurse for many years. She resigns from this employment on her 61st birthday. Three months later, Michelle takes up a 3 day position as a grief counsellor. Because Michelle has ceased employment as a nurse after her 60th birthday, she can access all her superannuation accumulated up until that point.

Situations sometimes arise where a person, aged 60 or over, is in two or more employment arrangements at the same time. According to APRA Prudential Practice Guide SPG 280, the cessation of one of the employment arrangements is the condition of release in respect of all preserved benefits accumulated up until that time. The occurrence of the ‘retirement’ condition of release in these circumstances will not enable the cashing of any benefits which accrue after the condition of release has occurred. A person will not be able to cash those benefits until another condition of release occurs (eg,s he also leaves her second employer).

Example: Two employment arrangements

Frank (age 63) works part-time as a school janitor. During the school holidays, he had a short-term six-week contract to work as a Census form collector. The contract finished in September 2016.

Because Frank has ceased one of his employment arrangements, he can access all his superannuation up until that point. However, any later contributions made (employer and personal contributions) and earnings will be preserved.

Director and Employee of own company

Sometimes a person is both an employee and director of their own company. They may wish to cease their employment duties with the company, but retain their directorship. The question arises as to whether such a person (age 60 – 64) can access their preserved superannuation benefits.

If a person is engaged in more than one arrangement of employment, the person can cease any arrangement of employment to meet the ‘age 60’ definition of retirement.

Therefore, as long as a person’s two roles are separate and they terminate in their capacity as an employee of the company, then even though they are still employed in the capacity as director, that person can access their preserved superannuation entitlements.

Note that there must be a distinct termination, ie cessation of all duties as an employee, and the person should now only operate in the capacity as a director for the company.

We see this lot where often a spouse had helped out for years but as the children join the business or the business matures, the requirement for the spouse to continue turning up day-to-day reduces. They can step away from the duties as an employee but they may still handle the liaison with the tax agent on the financials, ASIC re company registration and the ATO to pay tax instalments, which are more akin to Directors Duties.

When is a person gainfully employed?

The preservation age to age 59 retirement condition of release requires that a member has no intention of returning to gainful employment on either a part-time or full-time basis. Someone is said to be ‘gainfully employed’, for superannuation purposes, where they are employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation, or employment.

Gainful employment can either be on a part-time or full time basis.

Part-time means at least 10 hours per week and less than 30 hours per week.

Full time means at least 30 hours per week.

The definition of gainful employment involves two clear components:

Employment or self-employment, and

Gain or reward.

The term employee is not specifically defined in the SIS Act for this purpose; its common law meaning must be considered. One definition of employee is ‘a person in a service of

another under any contract of hire (whether the contract was expressed or implied, oral or written), where the employer has the power or right to control and direct the employee in the material details of how the work is to be performed’.

In contrast, self-employed people work for themselves instead of an employer, drawing an income from a trade, profession, or business that they operate personally. It would be expected that someone who claims to be self-employed would be running their own business (e.g. have a business plan, financial records, an ABN, a regular and frequent level of activity in the business, advertising etc).

The superannuation legislation provides no guidance as to what ‘running a business’ is. However, taxation law does. In particular, paragraph 13 of Tax ruling 97/11 outlines relevant indicators of running a business:

whether the activity has a significant commercial purpose or character;

whether the taxpayer has more than just an intention to engage in business;

whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

whether there is repetition and regularity of the activity;

whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

whether the activity is planned, organised and carried on in a business-like manner such that it is directed at making a profit;

the size, scale and permanency of the activity; and

whether the activity is better described as a hobby, a form of recreation, or a sporting activity.

Gain or reward is not defined in the superannuation legislation and therefore takes its ordinary meaning. The Macquarie Dictionary defines gain as ‘to get an increase, addition or profit’. Reward is defined as ‘something given or received in return for service, merit, hardship, etc’.

In the context of satisfying the gainful employment definition, it follows that the service, merit, or hardship must be completed with some expectation of an increase, addition, or profit. That is, there must be a direct link (or nexus) between the activity undertaken and the reward provided for the activity. The actual level or amount of gain or reward does not necessarily have to be commensurate with the level of effort or activity undertaken. So, the level of reward could be relatively small yet still suffice – as long as there is a direct link to the activity being performed. Further, the reward doesn’t necessarily have to be received as cash, but could be received as services, fringe benefits, or other valuable consideration.

The gain or reward element is typically difficult to satisfy in the case of charity or volunteer work. Non-paid work for a charity, for example, would clearly not qualify as gainful employment. Mere reimbursement of expenses would not seem to constitute gain or reward.

Also, as discussed earlier, gainful employment for superannuation purposes requires an individual to be either employed or self-employed. Most charities or volunteer organisations will not consider their charity or volunteer workers to be employees.

Transition to Retirement Income Stream (TRIS) condition of release allows a member to access their superannuation as a non-commutable income stream once they have reached preservation age. A non-commutable income stream for TRIS purposes is subject to a maximum annual draw down of 10% per annum. Preserved Benefits cannot be accessed through a TRIS as a lump sum until it meets the new “Pension phase” position.

From 1 July 2017 the tax exemption on investment earnings supporting a TRIS is no longer available. The actual income stream (pension payments) will still be tax effective under 60 and tax free after 60. However, a TRIS will regain its tax exempt status once the ‘retirement’ condition of release is subsequently satisfied, for example, where the individual terminates employment at any stage on or after age 60.

From 1 July 2017 it will be vital for SMSF trustees to immediately contact their Accountant/Administrator should the member retire permanently from the workforce, or terminate employment on or after age 60. When the administrator is notified that a no cashing restriction condition of release occurs (eg retirement), the balance of the TRIS account (at that stage) will be converted to a Retirement phase account-based pension (ABP), and the tax exemption on earnings will apply. However, it will then also count towards the individual’s $1.6 million pension transfer balance cap and needs to be reported to the ATO within the new reporting guidelines

Reaching age 65 will automatically result in a TRIS pension becoming a retirement pension and obtaining tax exemption on earnings, if within $1.6 million pension transfer balance cap.

Evidencing cessation of gainful employment

The cessation must be genuine. Genuine terminations of employment will typically involve the payment of accrued benefits, such as annual and long service leave. SMSF trustees should retain written evidence of the member’s cessation of gainful employment on file and copy to the administrator so the fund auditor has access.

Penalties apply to members, trustees and those who promote ‘illegal early access schemes’ to improperly access superannuation prior to meeting a condition of release.

I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

With all the talk about Total Super Balance caps and where people will invest money going forward if they can’t get it in to superannuation, the spotlight is being shone on “trusts” at present. This has also brought with it the claims of tax avoidance or tax minimisation, so what exactly are trusts and are there differences between Family Trusts, Units Trusts, Discretionary Trusts and Testamentary Trusts to name a few.

Trusts are a common strategy and this article aims to aid a better understanding of how a trust works, the role and obligations of a trustee, the accounting and income tax implications and some of the advantages and pitfalls. Of course, there is no substitute for specialist legal, tax and accounting advice when a specific trust issue arises and the general information in this article needs to be understood within that context.

Introduction

Trusts are a fundamental element in the planning of business, investment and family financial affairs. There are many examples of how trusts figure in everyday transactions:

Cash management trusts and property trusts are used by many people for investment purposes

Joint ventures are frequently conducted via unit trusts

Money held in accounts for children may involve trust arrangements

Superannuation funds are trusts

Many businesses are operated through a trust structure

Executors of deceased estates act as trustees

There are charitable trusts, research trusts and trusts for animal welfare

Solicitors, real estate agents and accountants operate trust accounts

There are trustees in bankruptcy and trustees for debenture holders

Trusts are frequently used in family situations to protect assets and assist in tax planning.

Although trusts are common, they are often poorly understood.

What is a trust?

A frequently held, but erroneous view, is that a trust is a legal entity or person, like a company or an individual. But this is not true and is possibly the most misunderstood aspect of trusts.

A trust is not a separate legal entity. It is essentially a relationship that is recognised and enforced by the courts in the context of their “equitable” jurisdiction. Not all countries recognise the concept of a trust, which is an English invention. While the trust concept can trace its roots back centuries in England, many European countries have no natural concept of a trust, however, as a result of trade with countries which do recognise trusts their legal systems have had to devise ways of recognising them.

The nature of the relationship is critical to an understanding of the trust concept. In English law the common law courts recognised only the legal owner and their property, however, the equity courts were willing to recognise the rights of persons for whose benefit the legal holder may be holding the property.

Put simply, then, a trust is a relationship which exists where A holds property for the benefit of B. A is known as the trustee and is the legal owner of the property which is held on trust for the beneficiary B. The trustee can be an individual, group of individuals or a company. There can be more than one trustee and there can be more than one beneficiary. Where there is only one beneficiary the trustee and beneficiary must be different if the trust is to be valid.

The courts will very strictly enforce the nature of the trustee’s obligations to the beneficiaries so that, while the trustee is the legal owner of the relevant property, the property must be used only for the benefit of the beneficiaries. Trustees have what is known as a fiduciary duty towards beneficiaries and the courts will always enforce this duty rigorously.

The nature of the trustee’s duty is often misunderstood in the context of family trusts where the trustees and beneficiaries are not at arm’s length. For instance, one or more of the parents may be trustees and the children beneficiaries. The children have rights under the trust which can be enforced at law, although it is rare for this to occur.

Types of trusts

In general terms the following types of trusts are most frequently encountered in asset protection and investment contexts:

Fixed trusts

Unit trusts

Discretionary trusts – Family Trusts

Bare trusts

Hybrid trusts

Testamentary trusts

Superannuation trusts

Special Disability Trusts

Charitable Trusts

Trusts for Accommodation – Life Interests and Rights of Residence

A common issue with all trusts is access to income and capital. Depending on the type of trust that is used, a beneficiary may have different rights to income and capital. In a discretionary trust the rights to income and capital are usually completely at the discretion of the trustee who may decide to give one beneficiary capital and another income. This means that the beneficiary of such a trust cannot simply demand payment of income or capital. In a fixed trust the beneficiary may have fixed rights to income, capital or both.

Fixed trusts

In essence these are trusts where the trustee holds the trust assets for the benefit of specific beneficiaries in certain fixed proportions. In such a case the trustee does not have to exercise a discretion since each beneficiary is automatically entitled to his or her fixed share of the capital and income of the trust.

Unit trusts

These are generally fixed trusts where the beneficiaries and their respective interests are identified by their holding “units” much in the same way as shares are issued to shareholders of a company.

The beneficiaries are usually called unitholders. It is common for property, investment trusts (eg managed funds) and joint ventures to be structured as unit trusts. Beneficiaries can transfer their interests in the trust by transferring their units to a buyer.

There are no limits in terms of trust law on the number of units/unitholders, however, for tax purposes the tax treatment can vary depending on the size and activities of the trust.

Discretionary trusts – Family Trusts

These are often called “family trusts” because they are usually associated with tax planning and asset protection for a family group. In a discretionary trust the beneficiaries do not have any fixed interests in the trust income or its property but the trustee has a discretion to decide whether anyone will receive income and/or capital and, if so, how much.

For the purposes of trust law, a trustee of a discretionary trust could theoretically decide not to distribute any income or capital to a beneficiary, however, there are tax reasons why this course of action is usually not taken.

The attraction of a discretionary trust is that the trustee has greater control and flexibility over the disposition of assets and income since the nature of a beneficiary’s interest is that they only have a right to be considered by the trustee in the exercise of his or her discretion.

Bare trusts

A bare trust exists when there is only one trustee, one legally competent beneficiary, no specified obligations and the beneficiary has complete control of the trustee (or “nominee”). A common example of a bare trust is used within a self-managed fund to hold assets under a limited recourse borrowing arrangement.

Hybrid trusts

These are trusts which have both discretionary and fixed characteristics. The fixed entitlements to capital or income are dealt with via “special units” which the trustee has power to issue.

Testamentary trusts

As the name implies, these are trusts which only take effect upon the death of the testator. Normally, the terms of the trust are set out in the testator’s will and are often used when the testator wishes to provide for their children who have yet to reach adulthood or are handicapped.

Superannuation trusts

All superannuation funds in Australia operate as trusts. This includes self-managed superannuation funds.

The deed (or in some cases, specific acts of Parliament) establishes the basis of calculating each member’s entitlement, while the trustee will usually retain discretion concerning such matters as the fund’s investments and the selection of a death benefit beneficiary.

The Federal Government has legislated to establish certain standards that all complying superannuation funds must meet. For instance, the “preservation” conditions, under which a member’s benefit cannot be paid until a certain qualification has been reached (such as reaching age 65), are a notable example.

Special Disability Trusts

Special Disability Trusts allow a person to plan for the future care and accommodation needs of a loved one with a severe disability. Find out more in this Q & A about Special Disability Trusts.

Charitable Trusts

You may wish to provide long term income benefit to a charity by providing tax free income from your estate, rather than giving an immediate gift. This type of trust is effective if large amounts of money are involved and the purpose of the gift suits a long term benefit e.g. scholarships or medical research.

Trusts for Accommodation – Life Interests and Right of Residence

A Life Interest or Right of Residence can be set up to provide for accommodation for your beneficiary. They are often used so that a family member can have the right to live in the family home for as long as they wish. These trusts can be restrictive so it is particularly important to get professional advice in deciding whether such a trust is right for your situation.

Establishing a trust

Although a trust can be established without a written document, it is preferable to have a formal deed known as a declaration of trust or a deed of settlement. The declaration of trust involves an owner of property declaring themselves as trustee of that property for the benefit of the beneficiaries. The deed of settlement involves an owner of property transferring that property to a third person on condition that they hold the property on trust for the beneficiaries.

The person who transfers the property in a settlement is said to “settle” the property on the trustee and is called the “settlor”.

In practical terms, the original amount used to establish the trust is relatively small, often only $10 or so. More substantial assets or amounts of money are transferred or loaned to the trust after it has been established. The reason for this is to minimise stamp duty which is usually payable on the value of the property initially affected by the establishing deed.

The identity of the settlor is critical from a tax point of view and it should not generally be a person who is able to benefit under the trust, nor be a parent of a young beneficiary. Special rules in the tax law can affect such situations.

Also critical to the efficient operation of a trust is the role of the “appointor”. This role allows the named person or entity to appoint (and usually remove) the trustee, and for that reason, they are seen as the real controller of the trust. This role is generally unnecessary for small superannuation funds (those with fewer than five members) since legislation generally ensures that all members have to be trustees.

The trust fund

In principle, the trust fund can include any property at all – from cash to a huge factory, from shares to one contract, from operating a business to a single debt. Trust deeds usually have wide powers of investment, however, some deeds may prohibit certain forms of investment.

The critical point is that whatever the nature of the underlying assets, the trustee must deal with the assets having regard to the best interests of the beneficiaries. Failure to act in the best interests of the beneficiaries would result in a breach of trust which can give rise to an award of damages against the trustee.

A trustee must keep trust assets separate from the trustee’s own assets.

The trustee’s liabilities

A trustee is personally liable for the debts of the trust as the trust assets and liabilities are legally those of the trustee. For this reason if there are significant liabilities that could arise a limited liability (private) company is often used as trustee.

However, the trustee is entitled to use the trust assets to satisfy those liabilities as the trustee has a right of indemnity and a lien over them for this purpose.

This explains why the balance sheet of a corporate trustee will show the trust liabilities on the credit side and the right of indemnity as a company asset on the debit side. In the case of a discretionary trust it is usually thought that the trust liabilities cannot generally be pursued against the beneficiaries’ personal assets, but this may not be the case with a fixed or unit trust.

Powers and duties of a trustee

A trustee must act in the best interests of beneficiaries and must avoid conflicts of interest. The trustee deed will set out in detail what the trustee can invest in, the businesses the trustee can carry on and so on. The trustee must exercise powers in accordance with the deed and this is why deeds tend to be lengthy and complex so that the trustee has maximum flexibility.

Who can be a trustee?

Any legally competent person, including a company, can act as a trustee. Two or more entities can be trustees of the same trust.

A company can act as trustee (provided that its constitution allows it) and can therefore assist with limited liability, perpetual succession (the company does not “die”) and other advantages. The company’s directors control the activities of the trust. Trustees’ decisions should be the subject of formal minutes, especially in the case of important matters such as beneficiaries’ entitlements under a discretionary trust.

Trust legislation

All states and territories of Australia have their own legislation which provides for the basic powers and responsibilities of trustees. This legislation does not apply to complying superannuation funds (since the Federal legislation overrides state legislation in that area), nor will it apply to any other trust to the extent the trust deed is intended to exclude the operation of that legislation. It will usually apply to bare trusts, for example, since there is no trust deed, and it will apply where a trust deed is silent on specific matters which are relevant to the trust – for example, the legislation will prescribe certain investment powers and limits for the trustee if the deed does not exclude them.

Income tax and capital gains tax issues

Because a trust is not a person, its income is not taxed like that of an individual or company unless it is a corporate, public or trading trusts as defined in the Income Tax Assessment Act 1936. In essence the tax treatment of the trust income depends on who is and is not entitled to the income as at midnight on 30 June each year.

If all or part of the trust’s net income for tax purposes is paid or belongs to an ordinary beneficiary, it will be taxed in their hands like any other income. If a beneficiary who is entitled to the net income is under a “legal disability” (such as an infant), the income will be taxed to the trustee at the relevant individual rates.

Income to which no beneficiary is “presently entitled” will generally be taxed at highest marginal tax rate and for this reason it is important to ensure that the relevant decisions are made as soon as possible after 30 June each year and certainly within 2 months of the end of the year. The two month “period of grace” is particularly relevant for trusts which operate businesses as they will not have finalised their accounts by 30 June. In the case of discretionary trusts, if this is done the overall amount of tax can be minimised by allocating income to beneficiaries who pay a relatively low rate of tax.

The concept of “present entitlement” involves the idea that the beneficiary could demand immediate payment of their entitlement.

It is important to note that a company which is a trustee of a trust is not subject to company tax on the trust income it has responsibility for administering.

In relation to capital gains tax (CGT), a trust which holds an asset for at least 12 months is generally eligible for the 50% capital gains tax concession on capital gains that are made. This discount effectively “flows” through to beneficiaries who are individuals. A corporate beneficiary does not get the benefit of the 50% discount. Trusts that are used in a business rather than an investment context may also be entitled to additional tax concessions under the small business CGT concessions.

Since the late 1990s discretionary trusts and small unit trusts have been affected by a number of highly technical measures which affect the treatment of franking credits and tax losses. This is an area where specialist tax advice is essential.

Why a trust and which kind?

Apart from any tax benefits that might be associated with a trust, there are also benefits that can arise from the flexibility that a trust affords in responding to changed circumstances.

A trust can give some protection from creditors and is able to accommodate an employer/employee relationship. In family matters, the flexibility, control and limited liability aspects combined with potential tax savings, make discretionary trusts very popular.

In arm’s length commercial ventures, however, the parties prefer fixed proportions to flexibility and generally opt for a unit trust structure, but the possible loss of limited liability through this structure commonly warrants the use of a corporate entity as unitholder ie a company or a corporate trustee of a discretionary trust.

There are strengths and weaknesses associated with trusts and it is important for clients to understand what they are and how the trust will evolve with changed circumstances.

Trusts which incur losses

One of the most fundamental things to understand about trusts is that losses are “trapped” in the trust. This means that the trust cannot distribute the loss to a beneficiary to use at a personal level. This is an important issue for businesses operated through discretionary or unit trusts.

Establishment procedures

The following procedures apply to a trust established by settlement (the most common form of trust):

Decide on Appointors and back-up Appointors as they are the ultimate controllers of the trust. They appoint and change Trustees.

Settlor determined to establish a trust (should never be anyone who could become a beneficiary)

Select the trustee. If the trustee is a company, form the company.

Settlor makes a gift of money or other property to the trustee and executes the trust deed. (Pin $10 to the front of the register is the most common way of doing this)

Apply for ABN and TFN to allow you open a trust bank account

Establish books of account and statutory records and comply with relevant stamp duty requirements (Hint: Get your Accountant to do this)

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

There are all sorts of unexpected consequences coming out of the changes to the superannuation rules. As a result of moving funds over $1.6m back to accumulation to meet the Transfer Balance Cap (TBC), you may in fact now qualify for the Commonwealth Seniors Health Care card.

How?

There may be a silver lining to the new $1.6 million transfer balance cap (TBC) for some SMSF members. Having less money in an account based pension and more money in accumulation or other assets may result in some SMSF members being entitled to receive the Commonwealth Seniors Health Card (CSHC). This is because amounts held in accumulation phase are not deemed for the CSHC and are not included in a member’s personal taxable income.

Now if the excess over the $1.6m is/was withdrawn out of superannuation, whether it will count as income for the CHSC will depend on how the client invests it. for example financial investments such as shares, rented investment property and interest will be deemed but a Holiday home not rented out will not be deemed towards the CSHC income test.

Older pensions may be even more forgiving!

Income from an account based pension is deemed under the usual Centrelink deeming rates unless the account based pension commenced before 1 January 2015, and the client was entitled to the card before 1 January 2015 and continues to hold the card. This is known as the grandfathering rules.

For SMSF members who are not eligible for the grandfathering rules, holding a significant amount of money in an account based pension means that they have a lower likelihood of being eligible for a CSHC. Prior to 1 July 2017, for most SMSF members it was more beneficial to hold as much as possible in an account based pension for tax purposes even if this meant they were ineligible for the CSHC. The tax savings on the excess would have outstripped the CSHC benefit.

However, from 1 July 2017, SMSF members can only hold up to $1.6 million in an account based pension and if they are also receiving defined benefit pension income the amount which can be held in account based pensions will be lower. Depending on other income the member receives, this may result in them now being entitled to the CSHC.

You don’t believe me? The following example explains how this works in a simple scenario:

Example – single person

James is single and is age 67. In the 2016 -2017 financial year, he had $2 million in his account based pension, and no other income.

The deemed income from his account based pension is calculated as $64,247 based on deeming rates and thresholds as at 1 July 2017. His deemed income exceeds the income threshold of $52,796 for the CSHC and therefore he is not entitled to a CSHC.

On 30 June 2017, he rolls $400,000 back to accumulation leaving $1.6million in his account based pension.

The deemed income on $1.6 million is $51,247 and is under the income threshold of $52,796 (20 March 2017) meaning that James is entitled to a CSHC after rolling back money from his account based pension to accumulation.

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

I am always on the lookout for good Australian educational content for new SMSF trustees and I know many people enjoy content delivered in short videos. Today we have another guest post but one with a difference.

Owen Raszkiewicz from Rask Finance has a passion for delivering free educational content and has just completed his 15 part video course which is an introduction to investing in shares, managed funds and ETFs. The course is suitable for those starting out and a good refresher for experienced investors trying to explain concepts to other trustees. He has kindly agreed to me providing these 15 1-2 minute bite size videos here on my blog for you.

So off we go:

And finally for those looking at investing in direct shares overseas

I hope this course has been helpful and please scroll down to comment and make sure to visit Owen’s webpage Rask Finance for more educational content or follow him on twitter @OwenRask .

Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get this educational material out there. As always please contact me if you want to look at your own planning needs or an SMSF review. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Not only do SMSF members need to have an up-to-date will but everyone who is a member of an SMSF needs to also put into place an enduring power of attorney.

The Australian Law Reform Commission’s (ALRC) recommendations in its final report titled “Elder Abuse – A National Legal Response” are positive steps towards helping mitigate the risks that could face ageing self-managed super fund (SMSF) members.

It involves changes to the superannuation laws to ensure that trustees consider planning for the loss of capacity of an SMSF member and estate planning as part of a fund’s investment strategy, and for the ATO to be told when an individual becomes a trustee of an SMSF because of an enduring power of attorney (EPOA).

TRUSTING SOMEONE TO DEAL WITH YOUR FINANCIAL MATTERS IF YOU CAN’T
An enduring power of attorney (EPOA) deals with your finances if you lose capacity or are unable to attend to financial matters personally and/or as a trustee of your SMSF. Your attorney is able to deal with your assets in the same way that you deal with them (subject to any directions or limitations and being appointed as a director of the SMSF Corporate Trustee). This includes signing tax returns and financial statements of the fund, buying and selling real estate or shares, accessing bank accounts and spending money on behalf of yourself personally and on your behalf as trustee of your SMSF.

For an EPOA to take your place as Trustee you must resign and they are appointed in your place. They cannot manage affairs of the SMSF using the EPOA alone, they must be made a trustee or a trustee director.

This is because if a member loses their mental capacity, perhaps through having a stroke or suffering onset of dementia, they will no longer be able to be a trustee of their fund, or a director of the corporate trustee, putting at risk the complying status of the fund.

Another occasion may be if a member departs overseas indefinitely. In this case their enduring attorney in Australia can become the trustee or director of the trustee in their place to avoid fund residency issues under subsection 295-95(2) of the Income Tax Assessment Act 1997.

Scenario we handled: Judith’s father was in the UK and had a fall. She flew back to check he was ok but found it was worse than expected and that he would need multiple surgeries and rehab over a protracted period and she would need to be there most of the time to manage the process and care for him. Her son, James, was her EPOA so she resigned as Director of the Trustee Company and James used the Enduring Power of Attorney to allow him to be appointed as director with her 2nd husband for the 3 year period she was away.

If you do not address the situation within the six-month period of grace allowed under section s17A(4) of the Superannuation Industry (Supervision) Act 1993 (SISA), the consequences for the fund and your retirement savings could be very serious indeed and attract severe penalties.

Unlike a general power of attorney, an EPOA continues to operate in the event that you lose capacity.

WHY SHOULD YOU HAVE A TRUSTED ENDURING POWER OF ATTORNEY?

It is important to have an EPOA in place for each fund member because without it, in the event that you lose capacity, your next of kin would have to make an application to the NSW Civil and Administrative Tribunal (or relevant government body in your state) to obtain a financial management order to deal with your assets. This lengthy (often more than the 6 month grace period allowed under the SIS Act) and costly process can be avoided if you have the foresight to establish your EPOA in advance. It can also lead to major friction in the family and especially with blended families and outcomes you did not expect or wish for under any circumstances!

EPOA SHOULD BE SOMEONE YOU TRUST AND CONSIDER APPOINTING SUBSTITUTE ATTORNEYS

We recommend that you seek legal advice and arrange for an EPOA to be prepared covering your personal finances and SMSF role. You may like to appoint your spouse, adult child, accountant, lawyer, business partner or close friend as your attorney in the first instance. Our legal advisers also suggest appointing substitute attorneys in case your primary attorney is unwilling or unable to act. We had one case where father had dementia but son who was EPOA was on secondment to PNG so could not take up the power of attorney

Your nominated attorney should be someone whom you trust and believe would make decisions in your best interests. I often recommend that you leave written details of your preferences for dealing with asset sales, buy backs, dividend reinvestment plans, term deposit maturities, minimum pensions and add clear instructions if they should work with trusted advisers like Financial planners, accountants and auditors before making major decisions.

You should of course consider having reversionary pensions or non-lapsing binding death nominations to ensure as much as possible that your wishes are carried out.

So when next reviewing your wills and powers of attorney just ask your solicitor if they are confident that the EPOA would also cover Superannuation matters or if that should be specifically mentioned.

I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

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We understand that the financial industry is full of jargon and concepts that can be difficult for people to get their head around or remember. So to learn more about money and finance at our Financial Knowledge Centre is a great place to start.